Commercial real estate financing is big business. It’s also a complicated world, but a necessary one to understand if you’re thinking of purchasing a piece of commercial property.
Let’s take a look at some of the common questions and concerns that business owners encounter as they learn how to finance their commercial real estate venture.
What is commercial real estate financing used for?
In general, this type of financing can be used to purchase any type of commercial property. This includes things like:
- Commercial office buildings
- Retail shops
- Warehouses or manufacturing facilities
- Income-producing units such as apartment complexes
- … and more.
Why finance? Usually, it’s because the investor doesn’t have enough cash to purchase the property all at once. Or, they’re working on building a commercial portfolio and don’t have the funds to pay outright for all of their investments.
How is commercial real estate financing different than non-commercial?
Most people are more familiar with non-commercial financing since they’ve likely purchased at least one home. Typically, you simply choose the length of term (15 or 30 years) and the rate is fixed by your lender.
In contrast, commercial real estate financing often varies greatly from loan to loan and can include:
- A larger down payment requirement
- More fees and a higher interest rate
- A wide variety of loan terms
- Long amortization periods
- Balloon and interest only features
3 questions to ask before you finance
Just like any other important business decision, there are a few things you should consider before deciding to finance your commercial real estate venture.
1.Will you apply as an individual or a business? This is often determined by how long your company has been in business. If you’ve been around for a while, getting a loan as a business entity can provide important tax benefits as well as protect your own personal assets. If you’re new in business, however, you may have to apply for financing as an individual.
2.What type of commercial real estate financing option do you want to choose? Unlike non-commercial loans, there are a wide variety of options available in terms of commercial financing. These include, but are not limited to:
- SBA loans from the Small Business Administration
- Bridge loans (to “bridge” the gap while waiting for a conventional loan)
- Certified Development Company loans (typically used to promote economic development within a community)
- Conventional commercial loans (often used when purchasing an income-producing property)
3.Evaluate the metrics. Explore the Loan to Value (LTV) ratio which compares the amount of the loan to the value of the property. You and your lender should also look at the Debt Service Coverage Ratio (DSCR) – how much money will be left over to handle operating expenses after paying the mortgage? Both of these metrics measure potential risk and can influence whether or not the lender will approve your loan.
Commercial real estate leasing vs. financing
There are several reasons why commercial real estate financing may NOT be in your best interest. If any of the following statements ring true for you or your business, you may want to consider commercial real estate leasing instead:
- You only plan to stay in this location for a short time.
- Your business is new and not well established yet in the community.
- The headache of having to manage and maintain the property yourself doesn’t appeal to you.
- You only need part of a building, such as a commercial office space, for your business to operate.
At TXRE Properties, we want to make your commercial real estate experience easy. Our professional commercial real estate brokers work with you to evaluate all of your options, answer your questions, and then offer you the best real estate solution to meet your needs.
Are you ready to find the best real estate option for your business in the Dallas-Fort Worth area? Great! Simply contact us today to get the process started.